How to know if a stock is worth investing serie

Hey there, I got an email from one of you asking me to explain some things in regards to my article regarding why BTCL share jumped to P1.02.

I admit I used really new terms I should have explained, but now I will be explaining those concepts each week like Price to Earnings, Revenue, Net income, dividends, profit, Earnings per share. So I decided to make a series for this one explaining all this for the next couple of weeks.

Why these are important?

If you want to understand what you as an investor are getting from your investment, you need to understand these things, I will try to be simple with it, but feel free to email me for further explanation, I myself am also learning these things, and they excite me to know them, I am forever a student of these type of stuff and like to share things that excite me.

Price per earnings

What is the P/E Ratio?

The Price-to-Earnings (P/E) ratio is a common metric used to evaluate a stock. It helps investors determine if a company is overvalued or undervalued in the market. Simply put, the P/E ratio tells you how much you are paying for each dollar of a company's earnings or profits.

How to Calculate the P/E Ratio

The formula for calculating the P/E ratio is straightforward:

{P/E Ratio} = Price per Share/Earnings per Share (EPS)

You divide Price per share by Earnings per share

Example Calculation

Let's say we have a company, Btcl. The stock price is P1.02 per share, and the earnings per share (EPS) is P0.15. To find the P/E ratio, we divide P1.02 by P0.15, which gives us a P/E ratio of 6.8 . This means you are paying 6.8 times the company's yearly profit to buy its stock.

Interpreting the P/E Ratio

- Low P/E Ratio (e.g., 10): The stock is considered cheap, indicating it might be undervalued.

- High P/E Ratio (e.g., 50): The stock is considered expensive, suggesting it might be overvalued.

Comparing Companies with P/E Ratio

The P/E ratio is particularly useful for comparing companies within the same industry. In Botswana only btcl is listed as a telecommunication company on the stock market, let’s use a different company to explain this. For instance, let's compare Bill's Bike Shop and another company, Sam's Scooter Company:

- Bill's Bike Shop: Price per share = $60, EPS = $3, P/E ratio = 20.

- Sam's Scooter Company: Price per share = $75, EPS = $5, P/E ratio = 15.

Even though Sam's Scooter Company has a higher stock price, its P/E ratio is lower, indicating it might be a better value because it is generating more earnings per share.

Industry-Specific Comparisons

It's important to use the P/E ratio to compare companies in the same industry. Different industries have different standards and growth expectations, so comparing a telecommunication company like btcl to a commercial bank like FNBB wouldn't provide useful insights.

Finding the P/E Ratio

You don't always have to calculate the P/E ratio yourself. Many financial websites, like Simply.wallst, provide this information. For example, you can look up FNBB on simply.wallst and find its current P/E ratio.

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Why Use the P/E Ratio?

The P/E ratio is a quick and easy way to assess the value of a stock relative to its earnings. It helps you compare different companies and make informed investment decisions.

That’s it with Price to Earnings, if you still need clarity you can email me, I want to keep these as simple and short as possible, next week I will cover dividends as the second key.